Tesco may have finally made its move, but infrastructure problems and restrictive rules are holding retailers back. By Richard Orange

The first stop a new British officer used to make after stepping on to Indian soil was the Bombay branch of the Army and Navy store – the British Empire's outfitter of choice. Nowadays the grand Italianate building where it was located, splendidly restored, is once again a department store: the flagship of Tata Trent's Westside chain.

So there's a kind of symmetry in Tesco's choice of Tata as its partner in Indian retail. When the leading British retailer on the sub-continent sold out five years after India's independence back in 1952, the Tatas were the buyer.

Now the leading retailer in Britain is launching in India half a century later, with the Tatas as allies.

It has taken more than three years of circling for Tesco to make its move. And the supermarket's initial outlay of £60m hardly counts as a major splash in a global retail market estimated to be worth $350bn (around £190bn) today.

It has been more than three years since India was declared the world's hottest retail market by management consultants AT Kearney. Corporate retail could grow as fast as 38 per cent a year, creating an industry worth $60bn by 2011.

But even now, the world's retailers are just tip-toeing in.

Under the deal, Tesco will shift several executives over to Tata Trent, where they will then bring Tesco's expertise to bear on Tata's Star Bazaar supermarket chain, which is expanding from four to 50 stores. Tesco will receive a franchise fee from Star Bazaar in return.

At the same time, the UK giant will launch three Tesco-branded cash-and-carry stores that will act as supply centres for the Star Bazaar chain as well as small Indian retailers, restaurants and other businesses.

Philip Clarke, who will run Tesco's operations in India, has admitted the delay in making its move could hurt Tesco. "We have handed the advantage to Wal-Mart. "It would have been nice to have been there before, but you can't have everything."

However, Wal-Mart's advantage is less pronounced than it could have been. The American group beat Tesco to forge a partnership with Bharti, one of India's more dynamic business groups, in November 2006. But it wasn't until well into this year that the partners finally announced their plans. Wal-Mart won't open its first cash- and-carry until the start of next year. Even then, it only aims to open 10 to 15 stores by 2009.

Others have moved more slowly still. Germany's Metro, which entered the Indian market in 2003, still has just four stores. France's Carrefour has held talks with several potential allies but has yet to strike a deal.

Next to the two leading Indian new entrants to the retail sector, Reliance Industries and Aditya Birla Retail, foreign firms have done nothing. Reliance is spending $6bn rolling out a huge chain of supermarkets, hypermarkets, clothes shops, electronics stores, toyshops and other formats. At the end of July, it said it had opened 735 outlets across India – more than double the number of its nearest competitor, Pantaloon.

But even Reliance is well behind the original scheduled target of opening 1,000 stores by the end of 2007.

Aditya Birla has unveiled 578 stores, whereas it had aimed for 600 by March 2008. It now aims to open 1,000 by next March.

"It has not been as easy as one thought it would be," admits Thomas Varghese, chief executive of Aditya Birla Retail. "The various impediments on the ground in terms of very high rentals and poor infrastructure have obviously put a dampener on many of the grand plans that foreign players had for India."

The retail arms set up by other Indian industrial groups, like RP Goenka's Spencer's and the Tatas' Star Bazaar, have made even less impact. "The reason is that there have been a lot of delays in setting up real estate projects, getting properties on time and getting the fitouts done," says Amnish Aggarwal, a retail analyst at Motilal Oswal in Mumbai.

Many of the international retail executives brought out to India to manage its new supermarket chains are handing in their papers and flying home. Andrew Denby, a former Sainsbury's man who was chief executive of Aditya Birla's supermarket division, was asked to leave. Andrew Levermore, once of House of Fraser, announced his resignation last week as head of Hypercity, a huge department store mall in Mumbai. Industry sources say many other less senior expatriate directors have left.

"The level of patience we have as Indians is a lot higher than people have when they come in from outside," explains Nitin Chordia, at Technopak, an Indian consultancy. "Our expectations are more attuned to reality."

No one anticipated the extent to which Reliance Fresh, Reliance's supermarket business, would become a magnet for protests from small shopkeepers, traders and farmers, who last year forced stores in several states to shut down. Opportunist politicians then jumped on the issue: Reliance Fresh is banned in India's most populous state, Uttar Pradesh.

Meanwhile, the Indian government has dragged back on freeing up rules on foreign retailers. Back in 2006, when Wal-Mart and Tesco were talking to Bharti, the government was close to removing a rule that banned foreign groups from selling multiple brands direct to consumers in India. Single-brand retailers like Reebok and Marks & Spen- cer can take 51 per cent stakes in outlets, and M&S signed a joint venture with Reliance in April. But supermarket groups have to settle for running cash-and-carry stores and franchise deals.

Tesco's finance director, Andrew Higginson, said last June that entering India could take five years as it waited for the country to relax the laws. But the agitation caused by Reliance's rollout has plunged even this prolonged timetable into doubt, forcing Tesco to go in regardless. In the government's new policy on foreign direct investment, announced at the end of January, there were no moves to free up the retail industry.

The hope that retail opening could follow in the wake of the decision by India's ruling coalition to drop the country's Communist Party as allies looks far- fetched. The Communists claimed blocking foreign retailers as one of their great achievements of last year. But the Samajwadi Party that replaced them at the start of August said it would support small shop owners against corporate retail.

Moreover, the pace of retail growth envisaged in bullish surveys now looks optimistic as India's high inflation forces the government to hike interest rates.

The great Indian retail opportunity looks like it will take a lot longer to materialise than anyone expected at the peak of the hype. But the Tatas as a group are renowned for their long time horizons: it took them nearly 50 years to turn the old Army and Navy building back into a department store.

Arvind Singhal, Technopak's chairman, says the Tatas make a much better fit for Tesco than Bharti would have done.

"Of all the combines that have been announced so far, I think the Tata-Tesco partnership will have the maximum chance of success and longevity."